Tax Attic July 11, 2013

The Internal Revenue Service (IRS) certainly has been taking some abuse lately. We all have an expectation that the IRS is going to treat all taxpayers equally; not playing favorites in a positive or negative fashion. The IRS even puts it in writing in its mission statement: “To provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” Some of the employees of the IRS seemed to have forgotten the “integrity and fairness to all.” Earlier this year it was made public that the IRS since 2010 had been targeting some specific groups that had applied for non-profit status by delaying the application process or making unnecessary and perhaps illegal information requests. A total of 296 groups experienced intentional delays in processing. 98 of those that suffered delays had the words “Tea Party, Patriot or 9/11 Group” in the application or in the group’s title. In addition, there were also some very bad You Tube IRS training videos that became public that were just bad public relations for the IRS. We all can have a bad day or two but the IRS was on its’ way to having a bad year.

In light of the fore-going, have you ever wondered who audits the IRS to see if it has done anything wrong or if there even is a separate department somewhere in the federal government with over-sight authority over the IRS? The answer is yes, there is a department within the Department of Treasury with over-sight authority. Apparently it has enough pull that the IRS has listened and made not only personnel changes but also policy changes. The name of the department is the Treasury Inspector General for Tax Administration or TIGTA. TIGTA was created by Congress when it passed the Internal Revenue Service Restructuring and Reform Act of 1998. At that time, it was given independent powers to over-see the IRS.

Since 2004, J. Russell George, an attorney and native of New York City, has been the head of TIGTA. On May 14, 2013 TIGTA issued a 48 page report that detailed what it found while investigating the IRS and making nine recommendations that involved developing and providing training to employees, developing processes to track requests for information, developing processes for tracking and documenting why applications are being reviewed; and developing a process to ensure cases under review are expeditiously resolved. On June 7, in response to the TIGTA report, the IRS issued a comprehensive 83 page report titled “Charting a Path Forward at the IRS: Initial Assessment and Plan of Action”. Ultimately the report agreed with seven of the nine TIGTA recommendations and the IRS has made changes accordingly. When releasing the 83 page report, Principal Deputy Commissioner Danny Werfel reviewed the three parts of the report, Accountability, Fixing the Problems with the Review of Applications for Tax-Exempt Status, and Review of IRS Operations and Risks. “The IRS is committed to correcting its mistakes, holding people accountable, and establishing elements that will help us mitigate the risks we face” said Mr. Werfel. In the Accountability section, all parties agreed that “significant management and judgment failures occurred, as outlined in the TIGTA report.”

There are five senior levels of senior executive management identified in the TIGTA report. The IRS replaced several people in each of the levels including the IRS Commissioner, the Deputy Commissioner for Services and Enforcement, the Acting Commissioner, Tax Exempt and Government Entities Division, the Director Exempt Organizations, and the Director Rulings and Agreements. In addition, more personnel actions may be taken. In the Fixing the Problems section, a fast-track approval process for non-profits was instituted. More technical and programming specialists were added to the Tax-Exempt Status department. In effect, the entire process for processing applications for tax-exempt status was over-hauled. In the final section of the report, Review of IRS Operations, there were several improvements to be instituted including highlighting the role of the National Taxpayer Advocate in assisting taxpayers to resolve problems they might encounter when dealing with the IRS.

TIGTA released a separate report on the status of the conferences that had lead to the embarrassing You Tube training videos. Evidently, 2010 was the year for large conferences within the IRS, specifically one held in Anaheim, CA. It was also the last year for large conferences within the IRS. In fiscal year 2010, large conference costs were $37.6 million. That amount dropped to $6.2 million in 2011 and decreased further to $4.9 million in 2012. According to the report, training related travel was also decreased from the 2010 costs by 51% in 2011 and was reduced by another 35% in 2012. In addition, no paid outside speakers are being used at any IRS conference or training seminar. In total, since 2010, the IRS has reduced its appropriated funding and increased its operating efficiencies by almost $1 billion. The report states: “New procedures and management oversight structures are now in place at the IRS in this area, and we are confident that an event like the one referenced in the TIGTA report would not occur at the IRS today.”

How difficult is it to do the job that the IRS has to do? Contained in the 83 page report was a discussion of the IRS’ “Mission Complexity”. I would say the IRS is in a tough spot. About 59% of all individual taxpayers pay a return preparer to complete their return. About 71% of all unincorporated business taxpayers employ a service to prepare their return. I would approximate that almost 100% of all incorporated taxpayers pay to have their return completed. The Internal Revenue Code is thousands of pages long backed up by thousands upon thousands of regulations, private letter rulings, administrative rulings, procedures, court cases, commentary, etc., etc. The IRS received more than 115 million telephone calls in each of the last two fiscal years. That is on top of the website contacts.

On top of everything else, Congress makes changes constantly to the Code. Those changes lead to more regulations, more private letter rulings, more administrative rulings, more procedures, more court cases, and more commentary. Congress should think about what happens down the line when they make substantial changes to the Code. The IRS is the middle-man between Congress and the taxpayers. As I said above, that’s a tough spot to be in the best of times. Taking into account that health care reform is going to impact the IRS greatly, I wonder just how efficient they will be when Obamacare is fully implemented. We will all find out in about 2015. This is Jerry Coon signing off.

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